Insured Bank’s Acceptance of Loan Payments Without Good Faith Constitutes Uninsurable Loss 

The United States District Court for the Southern District of Ohio, applying Ohio law, has held that a bank’s professional liability policy afforded no coverage for an insured’s settlement of a lawsuit that sought “disgorgement of monies” paid to the insured by a fraudster. Huntington Nat’l Bank v. AIG Specialty Ins. Co., 2022 WL 17741060 (S.D. Ohio Dec. 16, 2022). In addition to a loss carve-out for matters deemed uninsurable, the court held that coverage did not apply pursuant to an exclusion for claims for any “unrecoverable or outstanding credit.”

The insured bank identified “compounding red-flags” with a computer services business to which it had loaned funds. However, the insured “continued business as normal” and the computer services business ultimately paid off the loan. The computer services business later declared bankruptcy and it was determined that the business had repaid the insured with funds borrowed from other lenders. The bankruptcy trustee “believed that [the insured] put its desire to be repaid ahead of its concerns that [the computer services business] was committing a Ponzi scheme” and brought suit to recover funds that the insured allegedly accepted without good faith. The insured and the bankruptcy trustee reached a multi-million dollar settlement.

Prior to the settlement, the insured tendered the matter to its professional services liability insurer and requested coverage for the bankruptcy trustee’s recovery efforts. The insurer denied coverage, and the insured filed suit for breach of contract and bad faith. Both parties moved for summary judgment.

The court held that there was no coverage for the insured’s losses pursuant to an exclusion for “matters that may be deemed uninsurable under the law pursuant to which this policy shall be construed.” The bankruptcy court determined that the insured accepted some payments “without good faith.” As a matter of first impression, the court ruled that “Ohio courts are unlikely to permit insurance coverage for wrongfully obtained money.”

The insured unsuccessfully argued that “even if the uninsurable loss exclusion precludes coverage, [the insurer is] not entitled to summary judgment because [it has] not shown the uninsurable claim was the basis for or increased the amount of the settlement.” Rather, the insured asserted that coverage should be allocated based on its “motivation for settlement,” because it “may have settled for any number of reasons beyond the concern of repaying the transfers[.]” The court held that, while there are methods available to allocate between insured and uninsured loss, those situations do not apply because “none of [the insured’s] settlement is covered[.]”

The court further held that coverage did not apply pursuant to a separate exclusion which stated that “[t]he Insurer shall not be liable to make a payment for Loss in connection with any Claim or Claims made against any Insured . . . for the principal and/or interest of any unrepaid, unrecoverable or outstanding credit” with respect to “any act performed by an Insured for . . . a customer or client of the [insured] relating to an extension of credit, a refusal to extend credit or an agreement to extend credit.” The court determined that the exclusion applied because the insured extended a line of credit to the computer services business and sought coverage from its insurer for “outstanding and unrecoverable credit.”

The court accordingly rejected the insured’s bad faith allegations because “[w]here a claim for bad faith rests upon the same allegations as a claim for breach of contract and there has been no breach of contract, the bad-faith claim fails as a matter of law.”